By Dev Raj Singh & Sunil Kumar,
Overseas investment from India is one of the key steps for entering new global ‘bazaars’ and making India’s presence felt in the global arena. The Covid-19 pandemic caused some turbulence, but recently, a positive upward trend has been witnessed in these outbound investments because of a stable economy and favourable market conditions. According to the department of economic affairs , India’s overseas investment stood at $17.54 billion in FY22 compared to $12.36 billion in FY21. In FY23 (April-June 2022), it stood at $2.94 billion. During the last four months of the current financial year, Singapore was the top preferred investment destination, followed by the US and Mauritius.
In line with the increasing global presence of the Indian conglomerates and with the change in the business ecosystem globally, the government started simplifying the 18 year old overseas investment regulatory framework last year by issuing the draft guidelines. On August 22, the Centre revamped the overseas investment guidelines with a vision to unfold a liberal architecture of self-regulation keeping in mind the evolving business needs in an increasingly integrated international market, thereby aligning with the present business and economic dynamics. With the introduction of these new guidelines, an effort is being made by the regulators to streamline the existing framework to align with the global scenario and overcome practical challenges faced by the stakeholders in the erstwhile regime by introducing new concepts to eliminate ambiguity. By putting disinvestment and write-off transactions under the automatic route, the government has acknowledged the risk of undertaking overseas business and promoting the ease of business for Indian corporates.
Liberalising investment criteria
Indian investor organisations can invest up to four times their net worth. The definition of ‘net-worth’ was restrictive in the erstwhile regime; start-ups receiving funds through share premium found it challenging to use share premium while making overseas direct investments (ODIs). The new regime has liberalised the scope of ‘net-worth’ by including share premium and enhancing the investable limit resulting in new avenues for those Indian start-ups to explore new overseas jurisdictions and build their businesses aboard.
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NOC required for default/under investigation cases
In case the Indian investor is classified as a non-performing asset/bank defaulter or is under investigation by any financial sector regulator or investigating agency, an NOC is mandated to be procured and the bank/regulator is required to respond to the NOC request within 60 days, given that banks and investigative agencies are in a better position to assess the fact pattern depending on the nature of investigations and a 60-day timeline would ensure quick decision making.
Permitting indirect investment back to India
In many cases, the regulators have witnessed that the outbound investment is resulting in inbound investment. The same was on account of the business and structuring needs of the companies. Under erstwhile regulations, the same was not expressly restricted; however, it was not considered a bonafide business. Acknowledging the business requirement and experience gained under the old regime, Indian investors have now been permitted to invest in a foreign investee entity that has investments or invests in India up to two layers of subsidiaries without seeking any prior RBI approval.
Safeguarding our economic interests
The new guidelines aim to safeguard India’s economic interest while undertaking overseas investments. Indian investors can use only ‘owned funds’ for investing in foreign start-ups, given the risky nature of business. The foreign investee entity other than the strategic sector should have ‘limited liability’. The option to pay consideration for acquiring foreign securities on deferred payment basis now available subject to fulfilment of certain terms. Permissibility has been granted to restructure balance for loss-making investments.
Late Submission Fees
To reduce the compliance burden, the RBI has introduced late submission fees (LSF) instead of a formal compounding process. The same facility of LSF applies to contraventions committed under the erstwhile regulatory framework too.
RBI has simplified, streamlined, and liberalised the existing framework for overseas investments. Permitting ODI/FDI structures and changes in the net-worth definition may help not only in raising funds overseas but also increase the ability of Indian entities to invest. It will also give flexibility to the Indian entities to list overseas entity Additionally, by permitting non-financial entities to invest in foreign financial entities or the International Financial Services Centre, a new avenue has been added for Indian companies to enter overseas financial space. The guidelines have been perceived positively by all stakeholders and will boost overseas investment by Indian investors.
The author is Associate partners, tax and regulatory services, EY India